4. Employment

Your business has several forms of leverage available to them, enabling them to create more value. One of the most important is the ability to hire people.

Contractors against employees

There is a distinction in the rights of US employment between employees and those working on behalf of a company but not used by it. This includes independent consultants and contractor for the sake of not repeating ourselves, we will call the contractors below.

Employees have their work activities substantially controlled by the company. Entrepreneurs operate their own businesses and happen to have the company as a customer of their business; their relations with the company are more similar to that of a seller with their client an employee with their boss.

Many smaller companies, including Internet companies prefer to employ people as entrepreneurs because there is less paperwork required for employees, the direct cost is lower and it is fractionally easier get in and out of relationships with entrepreneurs. US laws and different states have established some protection for employees who do not apply to contractors.

Determining whether someone is an employee or contractor

The IRS lists three tests, which has several forks:

The test relationships

The behavioral control test

Financial Control Testing

Unfortunately for entrepreneurs, these tests do not have so-called “safe harbors” – there is no simple way to tell with certainty that someone will definitely classified as a contractor held for an entrepreneur. The tests are balancing act-examination official weigh the different factors against each other to come to a determination. While it is important for you that someone is classified as an entrepreneur, you should know that your position on each issue and you should try to make it be overwhelmingly clear (And documented!) That tests consistently indicate contractor relationships.

This is a complicated area of ​​law. You should discuss this with your attorney before hiring anyone.

How do I use one?

Assuming you’ve decided to hire someone as a full employee, you will want to consider having a Letter of Offer employees and one Employee Handbook. Your contract of employment will usually be short and standardized across all employees in your company. Your employee handbook will be slightly longer, and describes a wide range of policies that your company has established with which you expect that employees are familiar.

Your letter of offer and your employee handbook will be written by lawyers, and likely not adapted for the customer’s needs with your company details at the beginning. They are risk-reduction devices for business; Chief purpose explains that each employee was given proper notice of a variety of things that, in your jurisdiction, you must provide the explicit opinion. It is highly dependent on your particular jurisdiction, which is one reason that you will always talk to a lawyer before hiring someone for the first time.

Intellectual property Tasks

The companies produce the “intellectual property” (IP) – copyright, patents and invention-as something that goes without saying. The IP can be as simple as “words on your website” or as complicated has fully – functional software application process or business.

It is critically important as technology companies, especially product companies own all the IP have produced for him by employees and contractors. If it does not, an employee or contractor could a later claim that you are violating their IP by continuing to operate your business, and forces you to stop, circumcise their IP (at great cost), or pay them a sum of exorbitant money to leave.

This is not a speculative threat for Internet companies. The IP is probably central to the entire operations of the company. Many Internet companies have trajectories where some events, such as receiving the investment or closing an acquisition, are triggered on investigations intensive diligence regarding the appropriate IP property. The combination of these factors transform anyone with IP not assigned to a company headache if they are willing to cooperate or a very expensive problem if they are not. Note that, as a society progresses, it will tend to part ways with an employee or a partner in circumstances less-than-ideal at least once; you do not want to be issues of IP available a stick to beat you with that occurring.

There is a relatively simple method to insulate your company IP issues: working with counsel to obtain signed Task IP of everyone who works for your company without fault. This includes all founders of the company, all employees and anyone working for the company in any capacity, including independent contractors and entities doing work for hire for you. It does not matter if someone is only a customer service contractor or an independent web designer brought in for a day.

It is also easier to ask everyone to sign an agreement that IP task to track which should have signed an agreement, especially as the technology industry changes it is rife with CTOs that were rented as internals ‘was it four years ago and have not signed a new contract since.

Your lawyers can draft an IP task for you, or that you include in your employment agreement or MSA standard contractor you ask to be signed separately but simultaneously. Your agreement will likely default to the company with everything that an employee thinks even during their term of employment with you. Employees could push on this and their reasoning may or may not be sound; if applicable, your lawyer can discuss it with them. Generally, you should stick with the form that you have been provided except in extreme circumstances.

Most law firms that do substantial amounts of business with Internet companies will have an IP task caliber ready to go for a symbolic price. They are often quite long, as is a high preponderance issue for Internet companies and get these agreements examined in a variety of high-stress scenarios with huge amounts of money on the line.

If your company later gets a movie made about him having an IP task ready from day to prevent a subplot this to pay a ridiculous amount of money on someone who has never really worked for you.

Many Internet entrepreneurs are amazed how investors and lawyers are insistent about it. For technology companies, Pipis the business. Moreover, IP ownership issues it is usually much easier go on the input (when the IP cannot be worth much) than the posterior (where the IP may have proved integral to success of the company) and pay attention to the input is key to ensure you are free from the issues down the line.

Equity for employees

We will write more lately about this. Meanwhile, know this above all: most sophisticated founding avoid giving equity (or rights to acquire equity, such as stock options) quite the founders or employees. Instead, they insist on “investing” where the right to equity or options is earned over time. The norm in Silicon Valley is “inauguration four years of a cliff a year”; the person has no right to equity or option exercises during the first year, has rights to 25% of the reward immediately the date of their first birthday and gets straight to the rest even during the 36 months following.

The inauguration is critically important. Foundation teams break. Frequently! The employees quit or get fired. Frequently! You may not want a material part of your company to be owned by someone who worked for you for six weeks … there five years. It could complicate discussions about receiving the investment or sell the business, and it may not align incentives with the sustained effort over time that sets meaningful companies.

Pay slip

Your company will be required to calculate and retain an anticipated amount of taxes to all employees of the company. (In the US, employers retain an anticipated amount of taxes, but employee files a tax return once a year to calculate how much actually “really” have-then arrange directly with the government for the difference. )

Many employers in the United States’ run payroll “every two weeks, traditionally the Friday. Some pay twice a month, the 15th and last day of the month. It is less common to run monthly magazine (which may or may not be permitted in your jurisdiction); some employers run the weekly, which is more expensive and more work but results in the employee obtaining paid more often they like.

At smaller scales, some founders are trying to calculate the payroll for the founding team and the first employees only. Virtually all starts with a handful of employees will choose to use a payroll service to control the calculation of payroll, deduction of withholding tax at source, submissions quarterly returns withholding tax at source, and other assorted operational tasks.

Your payroll process does not typically includes entrepreneurs, who are responsible for their own tax payments, which are paid periodically after they charge you (under your contract) rather than a very predictable program like most employees.

Your business, once a year, will publish “an informational return” to each employee or contractor of your business. In the US, most employees receive a W-2 and contractors receive a 1099-MISC. These will generally classified by your accounting department or payroll on your behalf. When you hire someone, ask them to complete a W-9 form to receive their Social Security number or other unique identification number that will be required for the current payroll for them. If you hire someone who is not a citizen of the United States or a resident and that does not actually do the work in the United States, you cannot be required to pay employment taxes on them, but you should collect their information on a W-8BEN to document this choice. For details, please ask your accountant international taxation is very fact-specific and can get tricky, especially when bilateral tax treaties entered into play.